Additional Tier Capital (also known as AT1 bonds) is a type of unsecured, perpetual bonds issued predominantly by banks to raise additional Tier 1 capital without any maturity date (perpetual), but they have a call option. These bonds are issued by banks to shore up their core capital base to meet the Basel-III norms.
Features of AT1 bonds
The issuing bank of perpetual bonds issuer has the option to call back the bonds or repay the principal after a specified period of time.
AT1 bond offers credit comfort (based on underlying) with higher rates than tier-II bonds (which normally come with a finite maturity).
In some cases, there could be a clause to convert into equity as well.
The risk involved in AT1 bonds investment:
The issuing bank has the discretion to skip coupon payments in case of losses for the period when the interest needs to be paid.
These bonds can get written down if the common equity tier 1 (CET1) of the bank falls below 5.5 percent.
Regulatory instructions to banks under prudential norms:
The “eligible amount” for purpose of issue of PDIs by banks in foreign currency shall be as per RBI Master Circular dated July 1, 2015. According to the said circular, referred in this regard would mean that as of March 31 of the previous financial year, on the higher of:
(a) 1.5% of Risk-Weighted Assets (RWAs) and (b) Total Additional Tier 1 capital
(b) Not more than 49% of the “eligible amount” as above can be issued in foreign currency and/or in rupee-denominated bonds overseas.
For illustration of eligible amount click ‘clarification‘.
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